Using sodium dodecyl sulfate-polyacrylamide gel electrophoresis (SDS-PAGE) and Western blot analyses we have identified immunoreactive prolactin (PRL) proteins with molecular weights of 24 and 16 kD in the female rat brain. Because PRL target tissues have been shown to contain enzymes which, in vitro, cleave PRL into a 16-kD PRL fragment, studies were performed to characterize PRL proteolysis in the female rat brain. In vitro proteolysis of PRL was examined by incubating [125]I-PRL with 25,000 g subcellular fractions followed by SDS-PAGE under reducing conditions. At acidic pHs, incubation of PRL with 25,000 g hypothalamic fractions consistently resulted in the generation of a 16-kD fragment. The generation of the 16-kD fragment was time and tissue concentration dependent. Enzyme inhibitor analysis indicated that PRL proteolysis could be blocked by aspartate and serine protease inhibitors, but not sulfhydryl, metalloenzyme or trypsin protease inhibitors. Subcellular localization of hypothalamic PRL proteolytic activity by equilibrium density centrifugation revealed a bimodal distribution of proteolytic activity with modal densities of 1.12 and 1.24 g/ml. Homogenization of the tissue in a hypo-osmotic medium disrupted the high density peak resulting in a single low-density peak at the top of the gradient. These data indicate that subcellular fractions of the rat brain contain enzymes which can cleave PRL into a 16-kD fragment under acidic conditions. The majority of the enzymatic activity is localized in membrane-bound particles with a density similar to subcellular particles which contain PRL.